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UNE-P and the Future of Telecom ‘Competition’

On February 8th the Telecommunications Act of 1996
turns seven years old. Few will be celebrating the occasion. The
telecom industry lies in shambles. While job creation, new
investment, and increased entry followed the passage of the Act,
recent years have witnessed a stark reversal of fortune for
companies, consumers, and investors alike as the market has tanked
with a vengeance. Job cuts have been severe, once mighty stocks are
trading for a tiny fraction of where they previously stood, debt
loads are ballooning, bankruptcies are everywhere, and industry
investment has plummeted. What gives? Has the Telecom Act been a
failure?

The latest battle in this protracted war of words and paper is
currently taking place at the FCC as both sides eagerly await a
decision from the FCC in its Unbundled Network Element Triennial Review.
This proceeding is reevaluating the unbundled network element
platform (UNE-P) that incumbent local exchange carriers (ILECs) or
Baby Bells must provide to competitive local exchange carriers
(CLECs) at regulated rates. And according to supporters of the
UNE-P regime, nothing less than the entire future of telecom
industry competition is at stake with this decision. They may be
right, but for all the wrong reasons.

Under the Telecom Act, Congress granted the FCC a generous
degree of latitude in terms of how to interpret the
interconnection, open access, and unbundling provisions of the
Telecom Act. Consequently, under the leadership of Chairman Reed
Hundt, the FCC embarked on a grandiose experiment in re-ordering
the affairs of the telecom sector. Hundt saw himself as an almost
messianic figure sent to save the industry from the Bells, so much
so that in his 2000 book, You Say You Want a Revolution, Hundt
candidly noted that, “Congress had not been mindful of Senator
[John] McCain’s repeated warnings against transferring power to me.
[T]he Telecommunications Act of 1996 made me, at least for a
limited time…one of the most powerful persons in the
communications revolution.” Indeed it did, and during Hundt’s reign
at the FCC, the agency aggressively crafted the implementing
regulations in such a way as to maximize short-term CLEC entry by
guaranteeing them cheap access to virtually every element of the
Bells’ networks. Hundt’s managed competition vision for the telecom
sector could be filed under the “burn the village in order to save
it” theory of political philosophy. In several chapters of his
book, Hundt boasts about Commission efforts to deliberately
handicap the Bells and advantage rivals. Considerations of future
innovation and investment took a backseat to the short-term goal of
rapidly increasing the number of new entrants into the market.
While Hundt’s regulatory house of cards did foster short-term
entry, these new rivals largely built “networks out of paper” in
the words of Manhattan Institute scholar Peter
Huber. They deployed few actual new facilities and instead
focused on lobbying the FCC for the broadest possible package of
UNEs at the lowest price possible. Regulatory arbitrage replaced
genuine marketplace competition. Counting noses (new entrants)
became more important than counting networks. And as for the
future, well, that was another day. Hundt’s crew had taken Keynes’
famous quip about us all being dead in the long run a little too
seriously.

The fatal conceit underlying this UNE-P regime and the forced
access regulatory ethos in general is that it presumes that new
products, systems, or technologies will be produced by companies
regardless of the regulatory environment or legal incentives in
place. UNE-P proponents repeatedly ignore the risk-reward
relationship in a capitalist society and its importance for
long-term economic investment and innovation. One need not be
versed in the works of Schumpeter or Hayek to understand what
AT&T Chairman and CEO Michael Armstrong eloquently summed up in
a 1998 speech: “No company will invest billions of dollars to
become a facilities-based broadband service provider if competitors
who have not invested a penny of capital nor taken an ounce of risk
can come along and get a free ride on the investments and risks of
others.” Worse yet, UNE-P supporters conveniently sidestep the
question of what happens if things turn sour. We know what open
access supporters will say if incumbents spend billions deploying a
ubiquitous and successful new network: open it up to “competitors”
and let everyone share that new system equally. But what if those
networks that the incumbents threw billions at prove to be a bust?
Will the so-called competitors help foot the bill then? Unlikely,
but that’s really what the UNE-P regime is all about: privatizing
the risks and socializing the rewards, to paraphrase technology
guru George Gilder.

At a minimum, therefore, it should be relatively uncontroversial
for the FCC to rule that investment in new technologies and
services will be exempted from the infrastructure sharing
provisions. That’s the easy part. The more difficult issue is what
to do about the older copper loops, switches and support systems
that are currently shared at below-cost rates. CLECs claim they
cannot survive without them and yet one wonders whether they should
if they cannot provide at least some of their own facilities.
Moreover, switching can be competitively supplied; many CLECs
already install their own switches in many regions. And
high-capacity loops (typically fiber) or inter-office transport
lines don’t need to be shared. There’s a lot of fiber in the ground
in most regions the CLECs serve today; they can negotiate access at
a good rate. And operations support systems (operator and director
assistance services or databases, for example) never belonged on
the list to begin with. They should be removed promptly from the
sharing regime.

Local loops (“last mile” copper lines) are the only element of
the local telephone infrastructure where the CLECs can make a
credible case that reproduction costs are prohibitively expensive.
Ignoring wireless competition and the fact that some cable
companies are serving some customers today, the short term
reality is that most citizens only have one phone line. Of course,
largely ignored in this debate is the question of whether or not
some of these CLECs might have more seriously considered investing
in new last mile facilities to homes and businesses if not for the
generous FCC unbundling rules. True, it would have been capital
intensive and required many agreements and alliances to deploy last
mile facilities, but the sharing rules essentially gave the rivals
an excuse for not even trying it to begin with. For that reason,
the FCC needs to consider a sunset plan for even these sharing
provisions. The gradual march of technological progress will likely
solve this problem for policymakers as wireless options proliferate
and carriers gradually deploy more fiber. It would make sense,
therefore, to place a firm cutoff on all sharing rules, including
local loops, after a gradual phase out. Set a date - perhaps
February 8, 2006? - and close the book on this misguided experiment
with micro-managing telecom markets.

Adam Thierer (athierer [at] cato.org) is the Director
of Telecommunications Studies at the Cato Institute in Washington,
D.C. To subscribe, or see a list of all previous TechKnowledge
articles, visit www.cato.org/tech/tk-index.html.